Well, the United Rentals tender offer that I participated in went through successfully. As expected, the offer was oversubscribed (press release), which means that more shares were offered than they were looking to buy. Only an estimated 34% of shares tendered will be bought, which left many would-be arbitrageurs holding shares of URI they didn’t really want. The stock price dropped to $16.83 as of the end of Friday.
Most Larger Investors Didn’t Do So Well
This means that even if you bought more than 100 shares at the lowest price available after the tender offer was announced ($18.95), sold whatever you could at $22 and sold the rest for the best price available afterwards ($17), you wouldn’t have made any profit. In fact, you would have lost about 4%. While you can always hold onto the stock and hope for a rebound, that leaves you as a stock investor, not an arbitrageur.
In practice, trying to game one of these tender offers on a large scale is very difficult. Even if you have confidence the offer will not be revoked, there are too many smart people playing. If the offer price is close to the current share price, the expected profit would be so low that the risk wouldn’t be worth it. If the offer price is significantly above the share price, then everyone will rush will tender their shares, ironically resulting in nobody being able to sell their shares.
Better Opportunity For Smaller Investors
However, if you bought an odd lot of 99 shares, which are given priority in many cases including this one, you would have gotten all your shares cashed out. Buying perfectly at $18.95 and selling at $22 would be a 16.1% gain in about a month’s time. Of course, your actual profit before commissions and fees would have only been $301.95. $300 is the cost of a schmoozing business lunch with a few martinis on Wall Street. Therefore, this is a great chance for small-time investors to have an edge.
My timing wasn’t quite perfect – I bought at $19.81 per share, resulting in a profit after fees of $191.91 (9.8%) in less than a month. Annualized return is likely to be north of 100%. Even after taxes, that will be buy me over 25 meals from the lunch carts. 😉
I’m pretty picky about which of these offers I decide to jump into, so we’ll have to see if any other interesting ones pop up.
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damn! i knew i should have bought it when you bought.. 🙂 NEXT time!
I had the same thing happen to me a year or two ago with Brocade when it merged (BRCD). There was a lot of furor about the stock price climbing close to the merger date and buyout of its target, but by the time that happened the price actually dropped. Then Brocade did some weird buyback and reissue which forced all original holder to cash out whether they wanted to or not. It kind of deflated the whole illusion of trying to game the stock price during such events. I’ve found instead basic research principles pay better, for example investing in IBM.
A book that has a couple of chapters on really fancy
financial deals is “Money Angles” by Andrew Tobias….
it was written in the late 70s, I think, but the stories
show what the real wheeler-dealers do…. 😀
Thanks for the “Money Angles” suggestion, harmgb. I haven’t read that book yet.
If you are interested in learning more about special situation investing, I recommend Joel Greenblatt’s You Can Be A Stock Market Genius. If I’m not mistaken, Andrew Tobias and Joel Greenblatt are friends. Greenblatt’s book actually lives up to its title. Of course, you might also want to consider subscribing to my own service, Fat Pitch Financials Contributor’s Corner.
I receive the cash for this tender on Friday. Any suggestions on how to enter this transaction in MS Money?
“I receive the cash for this tender on Friday. Any suggestions on how to enter this transaction in MS Money?”
Me too. 🙂 I would just say you sold the shares for $22 each, which is pretty much what happened. You’ll be subject to the appropriate capital gains taxes. Instead of commission, you probably had to pay the non-mandatory reorg fee. I would imagine this lowers your cost basis just like a trade commission does, but I’m not 100% sure.